The mechanisms of nephrotoxicity and hepatotoxicity of phenacetin are unknown. Since N-hydroxylation of acetaminophen leads to the production of a hepatotoxic metabolite of this drug, the possible N-hydroxylation of phenacetin was studied. Mass spectral proof has been obtained that phenacetin is N-hydroxylated in vitro. A quantitative assay for the N-hydroxylation of phenacetin has been developed. The N-hydroxylation reaction is catalyzed by a cytochrome P-450 mixed function oxidase, and the rate of the reaction is approximately 10 per cent of the de-ethylation reaction. N-hydroxyphenacetin is further metabolized in the microsomal incubation. An examination of the metabolites showed phenacetin was a major metabolite and another metabolite water soluble, presumably a deacetylated form. Both reactions required NADPH.